Yields on term deposits decline
YIELDS on the term deposits offered by the central bank went down yesterday, with demand for the week-long term deposits recovering, showing renewed interest in the short-termed instruments as market players expect the US Federal Reserve to raise rates this week.
The seven- day tenor saw higher demand during Wednesday’s auction, which came against lower bids for the month- long term deposits on the back of a nearly certain chance that the Fed will raise interest rates during its March 14-15 meeting.
Total bids for the seven- day term deposits rose to P41.125 billion, well above the P30 billion offered by the Bangko Sentral ng Pilipinas (BSP) and surging from the P32.444-billion demand seen during last week’s auction.
Banks and trust firms also asked for lower yields to average at P2.9823%, down from 2.9873% during the March 8 auction. Rates sought by these entities fell within a narrow 2.9-3.01% range.
In contrast, tenders for the 28-day tenor slipped to P176.891 billion from P206.714 billion the previous week, although still above the central bank’s P150billion offer. The average rate also dropped to 3.3249% from 3.3445% a week ago.
The term deposit facility (TDF) is the central bank’s main tool to arrest excess liquidity in the financial system by allowing banks and trust firms to place their idle funds under the new window in exchange for a small margin to be paid by the BSP. Through this, the BSP expects to bring market rates closer to its 3% benchmark rate and prod the firms to pursue interbank lending.
Yields fetched under the TDF have gone up since its launch in June 2016, which initially saw average yields at 2.5%, the floor of the central bank’s interest rate corridor.
“Changes in the bid to cover ratio can be expected from week to week as players adjust to client and other demands,” BSP Governor Amando M. Tetangco, Jr. said in a text message to reporters, while pointing out that demand for term deposits “remains good.”
BSP Deputy Governor Diwa C. Guinigundo added that the stronger appetite for the week- long term deposits reflected market uncertainty ahead of the looming Fed “lift-off.”
“The market continues to position itself against the backdrop of more than one or two US Fed rate hikes. There is preference for short-dated instruments like seven days versus 28 days. Hence, bid- to- cover ratio is increasing for the seven days,” Mr. Guinigundo said in a separate text message.
Looking ahead, Mr. Guinigundo said the central bank sees no need to tweak auction settings over the near term as the market remains awash with liquidity.
“The decline in interest rates for both tenors continue to indicate ample liquidity competing for limited volume of offering. We don’t foresee at this point the need for adjusting the volume of offering,” Mr. Guinigundo said. “As it stands, mopping up by BSP through the TDF remains appropriate and very forward looking because of the impending US Fed action.”
The central bank has kept the auction volume at P180 billion for the last two Wednesdays of March, marking the fourth straight month when the amount was retained since December. The BSP will offer as much as P30 billion for the seven-day tenor and P150 billion under the 28-day term.
Mr. Guinigundo earlier said that they are not rushing to adjust the 20% reserve requirement imposed on big banks as well, as the regulator takes a “wait-and-see” stance ahead of developments in the US and the global economy.